On 2 December 2020 the Court of Appeal in England handed down its judgement to uphold the appeal that had been brought in relation to the Part VII transfer of annuity business from The Prudential Assurance Company Limited (Prudential) to Rothesay Life Plc (Rothesay), collectively referred to as “the Appellants.”
The appeal was brought by the Appellants following the decision of the High Court, delivered by Mr. Justice Snowden on 16 August 2019, to decline to sanction the transfer of approximately £12 billion of nonprofit annuity liabilities from Prudential to Rothesay. The annuities in question had already been 100% reinsured to Rothesay and therefore the purpose of the Part VII transfer was to formalise the transfer of risk that had already taken place.
In his oral remarks when handing down the judgement, the Chancellor of the High Court, the Rt. Hon. Sir Geoffrey Vos, noted the following areas of disagreement with Mr. Justice Snowden’s original judgement:
- Mr. Justice Snowden’s decision to disregard the conclusions of the Independent Expert in relation to the likelihood of future capital support being required by Prudential and Rothesay. The Court of Appeal took the view that basing conclusions in this area primarily on the Solvency II financial strength of the transferor and the transferee was justified, notwithstanding that the Solvency II capital requirement is based on a one-year time horizon rather than a time horizon consistent with the lifetime of an annuity, given the role of the regulatory regime in protecting future solvency and the speculative nature of any assumptions about the future availability of parental support.
- Mr. Justice Snowden’s decision to disregard the non-objection to the transfer of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The Court of Appeal was mindful of the PRA’s and FCA’s views.
- Mr. Justice Snowden’s decision to assign significant weight to the argument by objecting policyholders that they had specifically chosen Prudential based on its age and venerability; the Court of Appeal concluded that the relevant consideration was whether the transfer would have a material adverse effect on policyholders, and that this rested principally on the impact of the transfer on the likelihood that obligations to policyholders would continue to be met.
The decision to uphold the appeal does not mean that the transfer has been sanctioned. The appeal was focused on the question of whether the original judgement in the High Court, delivered by Mr. Justice Snowden, was legally sound based on the information available to the High Court at the time. The Court of Appeal elected not to consider the question of whether it was appropriate to sanction the transfer based on current circumstances, and therefore the question of whether the transfer should be sanctioned will now be remitted to the High Court for a fresh round of hearings, in effect starting the Part VII transfer process again.
Milliman consultants Tim Hill and Sue Saip conducted a new broad-based survey on multiyear guaranteed annuities, capturing historical data for key industry competitors as well as company perspectives on a range of issues pertaining to these products into the future. Their survey summary provides carriers with competitive benchmarking to evaluate where they stand relative to their peers.
To download the survey summary, click here.
The release of Financial Accounting Standards Board (FASB) Accounting Standards Update 2018-12, Targeted Improvements for Long-Duration Contracts (ASU 2018-12, also referred to as LDTI), has created a flurry of activity in the life insurance industry, as actuaries and other professionals try to interpret and apply the new accounting standard.
Among other major changes, the standard creates a new category of liabilities for “Market Risk Benefits” (MRBs), which must be held at fair value, as defined under existing GAAP standards. The definition of an MRB encompasses, among other possibilities, all kinds of guaranteed living benefits and guaranteed death benefits (GMxBs) on deferred annuity contracts, including both variable annuities (VAs) and fixed indexed annuities (FIAs). Under current, pre-LDTI GAAP, many kinds of GMxBs are valued under an insurance benefit model, with reserves calculated under a Statement of Position (SOP) 03-1 methodology and typically not using market-consistent assumptions. Thus, the new fair value MRB model represents a significant change for some products, with both financial and operational implications.
This paper by Milliman actuaries offers perspective that can help insurers as they shape their new valuation methodologies for MRBs on FIA contracts. The paper focuses on the cash flow modeling aspects of MRBs on FIA contracts, especially the methodology for projecting indexed account growth.
Milliman conducted a new broad-based survey on fixed indexed annuities (FIAs), capturing historical data for key industry competitors, as well as company perspectives on a range of issues pertaining to these products into the future. Twenty-two companies submitted responses. According to Wink, Inc., these companies represent around 78% of the FIA industry, based on sales year-to-date June 30, 2018. Milliman consultants Tim Hill and Sue Saip provide more perspective in this report.
Milliman conducted a broad-based survey on single premium immediate annuities (SPIAs), capturing historical data for key industry competitors, as well as company perspectives on a range of issues pertaining to these products into the future. Twenty-eight companies submitted responses. According to Beacon Research, these companies represent almost 94% of the SPIA industry, based on 2017 sales. Milliman consultants Tim Hill and Sue Saip provide more perspective in this report.
Life insurers’ price-to-earnings (P/E) ratios have
historically been significantly lower than the average S&P P/E of 15.7. Variable
annuity (VA) writers, in particular, have experienced high betas and have typically
traded below their book values in recent years. The average beta and P/E ratio
of some of the largest VA writers is 1.5 and 8, respectively.
Variable annuity guarantees are generally perceived by market
participants (and rightly so) as extremely risky products with significant
market exposure. While companies have had tremendous success in managing this
risk primarily via hedging, market participants have not fully appreciated the
value of such risk management techniques. Decreased confidence in VA writers
leads to excessive trading and volatility, which translates into high betas and
low P/E ratios.
This article by Milliman’s Ken Mungan and Poojan Shah attempts to illustrate, through an example, that hedging VA guarantees can smooth company earnings. Even though the majority of VA writers have implemented hedge programs to manage the market risk, P/E ratios continue to be low.